Investing in mutual funds has inherent risks. You cannot totally eliminate all risk from any financial investment. However, you can significantly reduce your risk and lower your chances of losing your principle by following these seven tips.
1. Know the risks.
Not only should you know the risks but you should know them before you buy. Many people learn by trial and error. That way of learning means that you will get burned every time you learn a lesson. Your life will be more comfortable if you learn from the mistakes of others. Then you get the benefit of the lesson without the financial injury.
2. Discern who has your best interest at heart.
You always want to have your radar on so you can discern who is a friend or a foe. It takes practice to be able to tell who has your best interests at heart. If someone only calls you when they want you to buy something, they may have their self-interest above what is best for you.
One of the best principles to utilize when judging the merits of someone's ideas is to use third party verification. See if what someone tells you can also be verified by a third party. Who else says that this investment is a solid long term play?
3. Always understand how financial instruments work.
If you cannot explain how something works in one to three sentences then you may not fully grasp what it does or how it works. That lack of knowledge can end up harming you later. An easy way to research financial terms and investment vehicles is to use a search engine like Google or Ask.com. Type a term in a search engine and you will easily find simple explanations to almost any confusing terms.
4. Know your options.
Don't think that you must invest in the single item that is in front of you. Understand what options you have. You may discover that something that is similar but ten times better for your individual comfort level.
For example, many people have bought REIT's and mutual funds that invest in real estate over the last ten years. However many experienced investors that I know have been surprised to see people use these investment vehicles when they can easily invest in real estate directly as a private lender without the fees and expenses.
5. Stay within your risk comfort zone.
Some people fall into the trap of feeling that they must take more risk because they are close to retirement and need to grow their savings faster. This attitude can lead to chasing the highest return without fully assessing all of the risks involved. Staying within your comfort zone can bring you more sleep and less stress.
6. Get answers to all of your questions.
If you have serious reservations about an investment, do not purchase it. First, get your questions answered, and then decide if it is right for you. Too many people accept what someone presents to them without fully understanding it.
7. Ask an expert.
Talk to other people who know more than you do about the financial subject you are interested in. Discover their opinion and how they feel about the topic. They may be able to suggest an alternative that suits your needs better.
If you are wondering where you can find an investment that many experienced investors describe as being very secure and earns high returns, then go to http://www.securityandreturns.com/name-your-return-just-like-a-bank/
If you'd like to read a Special Report on getting higher returns in your IRA, then you can download it by going here http://www.securityandreturns.com and looking in the left hand column.
Written by Dan Snyder - founder of the Association of Private Lenders.